Explaining How ACH Transactions Work Using Dwolla

ACH payments are a popular type of payment method for businesses to offer consumers because of the low per-transaction costs and predictable processing timelines.

More than 25 billion ACH transactions are processed each year by the Automated Clearing House (ACH) Network, an electronic network of banks and financial institutions supporting both ACH credit and debit payments. Every year, this incredibly powerful network moves the equivalent of the GDP of the United States—the largest economy in the world—twice.

Dwolla gives businesses access this banking infrastructure with an ACH payment API. Start testing the Dwolla API for free in the Dwolla Sandbox and use this glossary to understand the language of the ACH Network.

But how do ACH payments work? Let us explain…

Types of ACH Transactions

Understanding how an ACH transaction works first requires understanding what type of transaction is being initiated

The ACH debit process is the withdrawal of funds from a bank account (such as setting up an automatic monthly car payment).

After providing the correct bank account information and authorization to withdraw funds each month, an ACH entry is created by the lender’s bank when payment is due. That entry is then sent to the consumer’s bank—which then debits the account for the amount due—and sends a credit to the lender’s bank account.

The ACH credit process is most commonly used by employers to deposit payroll directly into a bank account. Think of an ACH credit as money coming to you; an ACH debit is when money is deducted from your account.

There are ways to expedite processing times and—with Dwolla—additional functionality can enhance the payment experience for both the user and business.

Explaining ACH Credits & Debits

An ACH credit or “push” transaction is initiated by the payer of funds and pushes money to the receiving party.

An ACH debit or “pull” transaction is initiated by the receiver of funds and pulls money from the paying party.

In both cases, the ACH transaction is entered into the ACH payments system by an originator. The originator is responsible for obtaining the required authorization for each transaction.

Then, the originator delivers the ACH transaction to its chosen ACH operator—either the Federal Reserve or the Electronic Payments Network. If the transaction is a “push,” the ODFI (Originating Depository Financial Institution) will also debit its customer’s account before forwarding the transaction onto the ACH operator.

The ACH operator performs a switch role, passing the transactions on to the RDFI (Receiving Depository Financial Institution). If the transaction is a “pull,” the RDFI will debit its customer’s account upon receipt.

If the ODFI and RDFI use different ACH operators, the first operator switches the transaction to the second operator. ACH operators calculate net settlement totals for their banks on a daily basis and are submitted to the Federal Reserve—who manages the actual settlement process.

After settlement, the ODFI and RDFI will credit its respective customer’s account based on the type of transaction.

Illustrating an Example

To illustrate an example, let’s use Bill.

Bill gives his employer his bank account information for direct deposit of his paycheck. In this example, the company is initiating an ACH transfer to send money to Bill.

The company sends the ACH entry to its bank, which debits its bank account and forwards the entry to its ACH operator. The ACH operator passes the entry onto Bill’s bank, which then after settlement by the Fed, credits Bill’s bank account.

This was an example of an ACH credit or “push” transaction.

Additionally, Bill gave his utility company his banking information and has authorized the company to pull funds from his bank account for his electric bill. The utility company sends the ACH entry to its bank, which forwards the entry to its ACH operator.

The ACH operator passes the entry onto Bill’s bank, which debits Bill’s bank account. After settlement by the Fed, the utility company credits its bank account.

This is an example of an ACH debit or “pull” transaction.

Understand ACH Transfer Timelines

Use this visual resource to understand the various transfer types possible with the Dwolla platform.

ACH Transfer Failures & ACH Returns

Because the ACH Network is based on the assumption of good funds and correct information between both parties, a bank transfer can fail for a number of reasons even after the transfer has been processed (examples include insufficient funds, payment dispute, closed bank account, etc.).

ACH returns can be referred to as “ACH disputes” or “ACH chargebacks” but while those terms might seem like synonyms, they are crucially different.

“Disputes” and “chargebacks” are terms used heavily in the credit card space and imply that there is a third-party arbiter looking at evidence to determine a fair outcome. That does not happen during the ACH return process.

With nearly 70 ACH return codes, an ACH transaction is not “disputed” nor is it “charged back” it is simply returned.

Using Dwolla’s API for ACH Payments

With a white-label API, Dwolla offers businesses the option to integrate directly with their application or platform to initiate ACH transactions. This avoids having to send the user to a third-party site to enter payment information.

When comparing the fees between credit cards and ACH payments, credit card payments have higher processing fees since they are typically calculated as a percentage of the transaction.

ACH transactions can cost pennies to initiate and in some cases are free.

In addition to lower processing fees, funds that are transferred directly to verified a bank account can save on fraudulent activity. According to a 2016 AFP Payments Fraud and Control Survey, paper checks were the payment method most subjected to fraud in 2014.

Bank account verification is done to ensure funds are going to and coming from actual bank accounts without a suspicious history. Dwolla offers an in-house solution and additional integrations for businesses needing bank account and identity verification services.

Experience the Benefits of ACH + Dwolla

Now that we’ve explained how ACH transactions work, start initiating test transfers in our sandbox for free, right now.

Test Dwolla’s API in a replica of our production environment, complete with the features of the Dwolla Platform.

Dwolla, Inc. is an agent of Veridian Credit Union and all funds associated with your account in our network are held in one or more pooled accounts at Veridian Credit Union. These funds may not be eligible for share insurance by the National Credit Union Share Insurance Fund. Dwolla, Inc. is the operator of a software platform that communicates user instructions for funds transfers to Veridian Credit Union.